Why Venture Capitalists Opt Not to Invest in Certain Startups

We often come across situations where venture capitalists opt not to invest in certain startups. As a matter of fact, a good number of startups that apply for venture capital financing end up being rejected. I once came across statics alluding to the fact that only a (very) small percentage of the startups that apply for venture capital actually end up getting it. Against that background, it is critical for you, as an entrepreneur who is interested in venture capital financing, to understand the real reasons as to why the venture capitalists opt not to invest in certain startups. That way, you’d be better placed to avoid the mistakes that other entrepreneurs make: mistakes that ultimately result in them missing out on venture capital financing.

Firstly, we have situations where venture capitalists opt not to invest in certain startups because the startups’ business ideas don’t make sense. Thus, as the entrepreneur seeking to get venture capitalists to invest in your business, it is critical for you to ensure that the manner in which you explain your business idea makes sense, even to the conservative old-school minds who run most of these venture capital firms.

Secondly, we have situations where venture capitalists opt not to invest in certain startups because the amounts of money required for investment in the startups are simply too huge (or simply too small). You have to understand that most venture capital firms have floors and ceilings (minimums and maximums) in terms of the sums of money they are willing to invest in a single venture. If your capital requirements are too low, the venture capitalists are likely to advise you to instead explore other potential sources of business finance: such as bank loans. And if your capital requirements are too huge, the venture capitalists are, well, simply likely to tell you that they can’t finance you. Venture capitalists fear investing too much in any given business: which makes sense, seeing that they normally invest in startups, whose risk profiles are usually not so good.

Thirdly, we have situations where venture capitalists opt not to invest in certain startups because they don’t see the potential for growth in the startups. The startups’ business ideas may make sense, but if it so happens that the startups’ businesses are not scalable (that is, expandable on a grand scale), then the venture capitalists opt not to invest in the said startups.